Freewings Power & Infra Limited , Kolkata V. DCIT, Circle - 10(1), Kolkata , Kolkata

ITA 778/KOL/2018

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 6251 (ITAT-KOLKATA)
• Duration Of Justice: 9 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-01-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Assessment Year: 2012-2013
• Appeal Filed On: 23-04-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: IMLIMERAN JAMIR
• Assessee Lawyers: MIRAJ D. SHAH
• Keywords: Bad and doubtful debts
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL KOLKATA BENCH SMC KOLKATA BEFORE SHRI S.S, GODARA, JUDICIAL MEMBER ITA NO.778/KOL/2018 ASSESSMENT YEAR:2012-13 FREEWINGS POWER & INFRA LTD., GANGA BUSINESS CENTRE, 4, DHAKINAPUR, SHOPPING COMPLEX-02, GARIHAT ROAD (SOUTH), KOLKATA-700 068 [ PAN NO.AAACF 4480 A ] / V/S . DCIT CICLE-10(1) AAYAKAR BHAWAN, P-7, CHOWRINGHEE SQUARE KOLKATA-69 /APPELLANT .. /RESPONDENT /BY APPELLANT SHRI MIRAJ D. SHAH, ADVOCATE /BY RESPONDENT SHRI IMLIMERAN JAMIR, ADDL. CIT-DR /DATE OF HEARING 21-01-2019 /DATE OF PRONOUNCEMENT 25-01-2019 /O R D E R THIS ASSESSEES APPEAL FOR ASSESSMENT YEAR 2012-13 , ARISES AGAINST THE COMMISSIONER OF INCOME-TAX (APPEALS)-4, KOLKATAS O RDER DATED 08.02.2018 PASSED IN CASE NO.97/ CITDA-4/C-10(1)/2015-16, INVOLVING PRO CEEDINGS U/S. 143(3) OF THE INCOME TAX ACT, 1961; IN SHORT THE ACT. HEARD BOTH THE PARTIES. CASE FILE PERUSED. 2. THE ASSESSEES SOLE SUBSTANTIVE GROUND CHALLENGE S CORRECTNESS OF SEC.40A(2) DISALLOWANCE OF SALARY PAID TO ITS DIRECTORS TO THE TUNE OF 5.50 LAC. THERE IS NO DISPUTE THAT THE IMPUGNED SUM REPRESENTS PAYMENTS MADE TO A SSESSEES THREE DIRECTORS, NAMELY, SHRI SHANTILAL SARAF, SMT.RAKHI SARAF, AND SMT. SUSHMA JAIN AMOUNTING TO ITA NO.778/KOL/2018 A.Y. 2 012-13 FREEWINGS POWER & INFR LTD. VS. DCIT, CIR-10(1), KOL. PAGE 2 3 LAC EACH IN CASE OF FORMER TWO AND 1LAC IN THIRD PAYEE CASE; RESPECTIVELY. THE CIT(A) HAS PARTLY AFFIRMED THE ASSESSING OFFICER AC TION AS FOLLOWS:- 3. THE LD. AIR HAS SUBMITTED THE FOLLOWING- 'THIS GROUND OF APPEAL IS IN RESPECT OF DISALLOWANC E OF RS.5,50,000/- UNDER SECTION 40A(2) OF THE INCOME TAX ACT, 1961 ON ACCOUNT OF PA RT DIRECTOR REMUNERATION/ SALARY. DURING THE FINANCIAL YEAR ENDED ON 31-03-2012 THE A PPELLANT COMPANY HAS PAID THE DIRECTOR'S REMUNERATION AS UNDER WHICH ARE IN ACCOR DANCE WITH ITS RESOLUTION PASSED AT THE BOARD MEETING:- 1. SHRI SHANIILAL SARAF - RS. 3,00,000/- 2. SMT. RAKHI SARAF - RS. 3,00,000/- (B.COM GRADUAT E) ( DAUGHTER IN LAW OF SHRI SHANIILAL SARAF) 3. SMT. SUSHMA JAIRI - RS. 1,00,000/ -(M. A, B. COM GRADUATE) (DAUGHTER OF SHRI SHANTILAL SARAF) THE APPELLANT COMPANY HAS ALSO PAID SALARY OF RS. 3 ,00,000/- TO SMT. SHALINI JAIN (GRADUATE) (EMPLOYEE AND DAUGHTER OF SHRI SHANTILAL SARAJ) AND DEBITED THE SAME UNDER THE HEAD DIRECTOR'S REMUNERATION IN THE PROFI T AND LOSS ACCOUNT FOR THE FINANCIAL YEAR 2011-12. DURING ASSESSMENT PROCEEDINGS THE LEARNED ASSESSING OFFICER HAS ISSUED A SHOW CAUSE NOTICE ASKING WHY THE REMUNERATION/SALARY PAI D TO THE DIRECTORS OF RS.10,00,000/- WILL NOT BE RESTRICTED REASONABLY FO LLOWING THE PROVISIONS AS LAID DOWN IN SECTION 40A(2) OF THE INCOME TAX ACT, 1961. THE APPELLANT IN RESPONSE TO THE SHOW CAUSE NOTICE HAS SUBMITTED THAT THE REMUNERATION/ SALARY PAID TO THE DIRECTORS IS AS PE R THE RESOLUTION APPROVED AND PASSED IN THE BOARD MEETING. THE DETAILS OF WORKING RESPONSIBILITIES ALLOTTED TO THE DIRECTORS, THEIR QUALIFICATION, EXPERIENCE ETC. THE RELEVANT EXTRACT FROM THE REPLY OF THE APPELLANT IS GIVEN HERE UNDER:- 'THAT DURING THE YEAR UNDER CONSIDERATION, COMPANY HAS PAID/INCURRED REMUNERATION/ SALARY TO THE TUNE OF RS.10,00,000/ - WHICH IS LOWER THAN THE PRECEDING PREVIOUS YEAR. THAT IN THE IMMEDIATELY PR ECEDING PREVIOUS YEAR THE COMPANY HAS INCURRED REMUNERATION/SALARY TO THE TUN E OF RS.11,00,000/ -. THAT ALL THE EXPENDITURES ARE ON THE LOWER SIDE AS COMPA RE TO THE PRECEDING PREVIOUS YEAR. THAT THE REMUNERATION/ SALARY PAID TO THE DIRECTORS ARE AS PER THE RESOLUTION APPROVED AND PASSED IN THE BOARD MEETING. THE DETAI LS OF WORKING RESPONSIBILITY ALLOTTED TO THE DIRECTORS, THEIR QUA LIFICATION, EXPERIENCE ETC ARE ENCLOSED HEREWITH. THAT ALL THE DIRECTORS ARE INCOM E TAX PAYEE AND THE REMUNERATION GIVEN TO THEM IS CONSIDERED IN THEIR I NCOME TAX RETURN. THE COPY OF COMPUTATION, INCOME TAX ACKNOWLEDGEMENT ETC. OF ALL THE DIRECTORS FOR THE YEAR UNDER CONSIDERATION IS ENCLOSED HEREWITH. THAT THE COMPANY HAS DEDUCTED PROPER TDS ON THE REMUNERATION/ SALARY. THAT ALL TH E DIRECTORS ARE FULLY INVOLVED IN THE BUSINESS ACTIVITY OF THE FIRM. THAT THE COMPANY'S MAIN BUSINESS ACTIVITY IS MONEY LENDING TO VARIOUS PERSONS AND TO EARN INTEREST ON THIS LOAN AMOUNT. THIS IS VERY SENSITIVE BUSINESS AND VERY DU E CARE IS REQUIRED OTHERWISE FUND WILL BE CONVERTED INTO NPA/ BAD DEBTS. DUE TO FULL INVOLVEMENT OF DIRECTORS THERE IS NO BAD DEBTS AND EARNING INTERES T FROM THE PARTY REGULARLY AS PER THE STIPULATION. ITA NO.778/KOL/2018 A.Y. 2 012-13 FREEWINGS POWER & INFR LTD. VS. DCIT, CIR-10(1), KOL. PAGE 3 THAT ALL THE DIRECTORS ARE FULLY INVOLVED IN THE BU SINESS ACTIVITIES OF THE COMPANY AND THEIR WORKING RESPONSIBILITY, WORK EXPE RIENCE, EDUCATIONAL QUALIFICATIONS, AND THE REMUNERATION PAYABLE TO THE M ARE VERY REASONABLE AS COMPARED TO MARKET TREND SALARY TO OTHER EMPLOYED P ERSONS AND HENCE NO DISALLOWANCE SHOULD BE MADE UNDER SECTION 40A(2)(B) OF THE INCOME TAX. ACT, 1961. THEY ARE RESPONSIBLE FOR THE WORK/ DUTIES ALLOTTED TO THEM AND THE REMUNERATION IS FULLY APPROVED BY THE BOARD OF THE COMPANY AND COMPARABLE WITH THE PRECEDING YEAR. ' THE LEARNED ASSESSING OFFICER HAS PASSED AN ORDER U /S 143(3) OF THE INCOME TAX. ACT, 1961 ON 06/03/2015 AND PARTLY DISALLOWED DIREC TOR REMUNERATION/SALARY OF RS.5,50,000/ - UNDER SECTION 40A(2) OF THE INCOME T AX. ACT, 1961 BY TREATING THE SAME AS EXTRANEOUS AND UNREASONABLE WITH REFERENCE TO THE BUSINESS EXIGENCY IN THE CASE OF APPELLANT WITHOUT CONSIDERING THE FACT THAT IN THE PRECEDING PREVIOUS YEAR THE DIRECTOR REMUNERATION/SALARY WAS MORE THAN CURRENT PREVIOUS YEAR AND TO DISCHARGE THE DAY TO DAY AFFAIRS OF THE COMPANY THE DIRECTORS WER E WHOLLY RESPONSIBLE. THE LEARNED ASSESSING OFFICER HAS ALSO NOT CONSIDERED THE QUALI FICATION, JOB RESPONSIBILITY AND THEIR CAPABILITY TO DISCHARGE THEIR DUTIES. THE LEA RNED AO HAS NOT JUDGED THE REASONABLENESS OF THE REMUNERATION/SALARY FROM THE POINT OF VIEW OF A BUSINESSMEN I.E THE APPELLANT AND THAT SUCH REMUNERATION HAS BEEN A PPROVED BY THE BOARD OF DIRECTORS BY RESOLUTION PASSED IN THEIR MEETING. FURTHER THE SAID ACTION DONE WAS WITHIN THE PROVISIONS OF THE COMPANIES ACT, 1956 AND THERE WAS NO VIOLATION OF ANY PREVALENT LAW OF LAND. SIR, WE WOULD LIKE TO PLACE RELIANCE ON HON'BLE CAL CUTTA HIGH COURT IN THE CASE OF SONAR AIROTECH PUT. LIMITED VERSUS COMMISSIONER OF INCOME-TAX [1993] 204 ITR 304 (CAL) THE HON'BLE COURT OBSERVED AS UNDER; 'IT IS BY NOW WELL-SETTLED THAT THE TRIBUNAL CANNOT ADOPT A SUBJECTIVE STANDARD OF REAS ONABLENESS OF THE INCREASE IN REMUNERATION AND DISALLOW A PART OF THE INCREASE IN THE DIRECTORS' REMUNERATION ON THE GROUND THAT IT IS UNREASONABLY LARGE. THE REASONABL ENESS OF THE REMUNERATION HAS TO BE CONSIDERED FROM THE POINT OF VIEW OF A BUSINESSMAN AND IT WAS NOT OPEN TO THE TRIBUNAL TO ADOPT A SUBJECTIVE STANDARD WITH REGARD TO THE PROPER REMUNERATION WHICH SHOULD BE PAID TO ITS DIRECTORS. SIR, IN THE CASE OF NEWTONE STUDIOS LTD. V. CIT [19 55] 28 ITR 378 (MAD), THAT THE INCOME-TAX. OFFICER SHOULD NOT TAKE AN ARMCHAIR VIE W OF THE MANAGEMENT OF THE COMPANY AND DECIDE IN HIS OPINION WHAT WAS THE REAS ONABLE REMUNERATION FOR A DIRECTOR AND DISALLOW SUCH PART OF THE REMUNERATION AS HE CONSIDERED EXCESSIVE OR UNREASONABLE, WHAT APPLIES TO THE INCOME-TAX OFFICE R EQUALLY APPLIES TO THE APPELLATE AUTHORITIES INCLUDING THE APPELLATE TRIBUNAL. SIR, IN THE CASE OF EXTRUSION PROCESS PUT. LIMITED VERSUS COMMISSIONER OF INCOME- TAX, BOMBAY (1979) 119 1TR 287 (80M). 'THE REASONAB LENESS OF THE REMUNERATION HAS TO BE CONSIDERED FROM THE POINT OF VIEW OF THE BUSINESSMAN AND, IN OUR VIEW, IT WAS NOT OPEN TO THE TRIBUNAL TO ADOPT A SUBJECTIVE STANDARD WITH REGARD TO THE PROPER REMUNERATION WHICH SHOULD HAVE BEEN PAID TO THE MAN AGING DIRECTOR, IN OUR VIEW, THE TRIBUNAL WAS CLEARLY IN ERROR IN HOLDING THAT ONLY A PART OF THE INCREASED REMUNERATION FOR THE ASSESSMENT YEAR IN QUESTION SHOULD BE ALLOW ED.' ITA NO.778/KOL/2018 A.Y. 2 012-13 FREEWINGS POWER & INFR LTD. VS. DCIT, CIR-10(1), KOL. PAGE 4 SIR, IN THE CASE OF HIVE COMMUNICATION PUT. LTD. VE RSUS COMMISSIONER OF INCOME TAX [2013} 353 ITR 200 (DEL). HON'BLE DELHI HIGH CO URT DECIDED THE QUESTION IN FAVOUR OF THE ASSESSEE AND IN THE NEGATIVE HOLDING THAT THE TRIBUNAL WAS NOT CORRECT IN LAW IN UPHOLDING DISALLOWANCE OF RS. 13.20 LAES OUT OF REMUNERATION PAID TO MR. SUSHIL PANDIT (DIRECTOR) BY INVOKING THE 'PROVISION S OF SECTION 40A(2) OF THE ACT. SIR, HON'BLE ALLAHABAD HIGH COURT IN ABBAS WAZIR (P ) LTD. VS. CIT (2004) 265 ITR 77 (AIL). WHEREIN THE HIGH COURT HELD AS UNDER 'IN NEWTONE STUDIOS LTD. V. CIT [1955] 28 ITR 378 (MAD), IT WAS OBSERVED THAT THE R EMUNERATION PAID TO A DIRECTOR SHOULD NOT BE REJECTED BY THE ASSESSING OFFICER ON ANY SUBJECTIVE STANDARD OF REASONABLENESS, AND THAT SO LONG AS THE REALITY OF THE PAYMENT WAS NOT CHALLENGED AND NO ALLEGATION WAS MADE THAT (HE PAYMENT WAS DICTATE D BY OTHER THAN BUSINESS CONSIDERATIONS, THE DEDUCTIBILITY OF THE EXPENDITUR E SHOULD BE CONSIDERED FROM THE POINT OF VIEW OF THE BUSINESSMAN AND NOT FROM THE P OINT OF VIEW OF ANY OUTSIDER, INCLUDING THE ASSESSING OFFICER. SIR, IN CIT VS. EDWARD KEVENTER (PRIVATE) LTD. (197 2) 86 ITR 370, THE CALCUTTA HIGH COURT CONSIDERING IDENTICAL PROVISION IN 1922 ACT, IT WAS HELD THAT THE SECTION PLACES TWO LIMITATIONS IN THE MATTER OF EXERCISE OF THE PO WER. THE SECTION ENJOINS THE ASSESSING OFFICER IN FORMING ANY OPINION AS TO THE REASONABLENESS OR OTHERWISE OF THE EXPENDITURE INCURRED MUST TAKE INTO CONSIDERATION ( I) THE LEGITIMATE BUSINESS NEEDS OF THE COMPANY AND (II) THE BENEFIT DERIVED BY OR ACCR UING TO THE COMPANY. THE LEGITIMATE BUSINESS NEEDS OF THE COMPANY MUST BE JU DGED FROM THE VIEW POINT OF THE COMPANY ITSELF AND MUST BE VIEWED FROM THE POINT OF VIEW OF A PRUDENT BUSINESSMAN. IT IS NOT FOR THE ASSESSING OFFICER TO DICTATE WHAT THE BUSINESS NEEDS OF THE COMPANY SHOULD BE AND HE IS ONLY TO JUDGE THE LEGITIMACY OF THE BUSINESS NEEDS OF THE COMPANY FROM THE POINT OF VIEW OF A PRUDENT BUSINESSMAN. TH E BENEFIT DERIVED OR ACCRUING TO THE COMPANY MUST ALSO BE CONSIDERED FROM THE ANGLE OF A PRUDENT BUSINESSMAN. THE TERM 'BENEFIT' TO A COMPANY IN RELATION TO ITS BUSI NESS, IT MUST BE REMEMBERED, HAS A VERY WIDE CONNOTATION AND MAY NOT NECESSARILY BE CA PABLE OF BEING ACCURATELY MEASURED IN TERMS OF POUND, SHILLINGS AND PENCE IN ALL CASES. BOTH THESE ASPECTS HAVE TO BE CONSIDERED JUDICIOUSLY, DISPASSIONATELY WITHO UT ANY BIAS OF ANY KIND FROM THE VIEW-POINT OF REASONABLE AND HONEST PERSON IN BUSIN ESS. 'THE AFORESAID JUDGMENT OF CALCUTTA HIGH COURT WAS AFFIRMED BY THE APEX COURT IN CIT VS. EDWARD KEVENTER (PRIVATE) LTD. (1978) 115 ITR 149 (SC) SIR. SIMILAR VIEW IS HELD BY THE MADRAS HIGH COURT IN CIF VS. COMPUTER GRAPHICS LTD. (2006) 285 ITR 84. IN THE SAME LINE IS THE JUD GMENT OF BOMBAY HIGH COURT IN THE CASE OF CIT VS. SHATRONJAY DIAMONDS (2003) 261 ITR 258 (BORN). SIR, WE WOULD LIKE TO PLACE OUR RELIANCE ON DELHI I TAT IN THE CASE OF M/S. SECOND LEASING PVT. LTD. VS. DCIT, CIR-8(1) ITA NO. 2412/D EL/2013 DATED 19/05/2017. SIR, THEREFORE, UNDER THE FACTS AND CIRCUMSTANCES O F THE CASE AND IN THE LIGHT OF THE JUDICIAL PRECEDENTS CITED ABOVE, WE WOULD LIKE TO P RAY BEFORE TO DELETE THE DISALLOWANCE OF RS. 5,50,000/- UNDER SECTION 40A(2) OF THE INCOME TAX ACT, 1961. 3.1 I HAVE PERUSED THE ASSESSMENT ORDER AND THE SUB MISSIONS OF THE LD. A/R. FOLLOWING POINTS MAY BE NOTED - ITA NO.778/KOL/2018 A.Y. 2 012-13 FREEWINGS POWER & INFR LTD. VS. DCIT, CIR-10(1), KOL. PAGE 5 I) NO EVIDENCE WAS ADDUCED AT ASSESSMENT OR APPEAL LEVEL TO SHOW THAT ALL THE DIRECTORS WERE INVOLVED IN DEALING WITH THE BORROWE RS AS CLAIMED BY THE ASSESSEE. II) THE A.O. HAS RIGHTLY OBSERVED THAT EQUAL SALARY /REMUNERATION HAS BEEN PAID TO ALL THE THREE DIRECTORS SHRI SHANTILAL SARAF, SM T. RAKHI SARAF AND SMT. SHALINI JAIN EVEN THOUGH THEY DON'T POSSESS EQUAL E XPERIENCE AND DON'T HAVE IDENTICAL/ SIMILAR QUALIFICATION. III) THE CLAIM OF THE ASSESSEE THAT RS.3 LACS PAID TO RAKHI SARAF IS ON ACCOUNT OF HER LOOKING AFTER WORK TO AUDIT, TIMELY FILING O F RETURN ETC. IS NOT CORRECT. SINCE THIS RESPONSIBILITY WILL BE HARDLY TAKE MUCH TIME LOOKING AT A SMALL BUSINESS OPERATION OF THE ASSESSEE AND FURTHER SINC E THE ASSESSEE IS DEBITING INTERNAL AUDIT AND AUDIT FEES SEPARATELY IN THE ACC OUNTS (PETTY AMOUNT OF RS.15,000EACH). IV) SIMILARLY THE A.O. HAS MADE THE COGENT REASON F OR MAKING DISALLOWANCE OF SALARY PAID TO SMT. SUSHMA JAIN IN PARA 2.5 OF HIS ORDER. THE CASE LAWS CITED BY ID. COUNSEL ARE ALL DISTINGU ISHABLE ON FACT AND THEREFORE CAN'T BE RELIED UPON. 3. I HAVE GIVEN MY THOUGHTFUL CONSIDERATION TO RIVA L CONTENTIONS. BOTH PARTIES REITERATED THEIR RESPECTIVE STANDS AGAINST AND IN S UPPORT THE IMPUGNED DISALLOWANCE. THE REVENUE VEHEMENTLY CONTENDS BEFORE ME THAT ASSE SSEE HAS FAILED TO PROVE THE CONCERNED PAYEES ELIGIBILITY AND QUALIFICATION. HE FAILS TO REBUT THE FACT THAT BOTH THE LOWER AUTHORITIES HAVE SIMPLY BRUSHED ASIDE ASSESSE ES PAYMENT CLAIMED WITHOUT EVEN DRAWING A COMPARISON OF THE MARKET RATE OF THE CORR ESPONDING SERVICES VIS--VIS EDUCATIONAL QUALIFICATIONS. I FIND THAT NEITHER OF THE LOWER AUTHORITIES HAS TAKEN INTO ACCOUNT ASSESSEES BUSINESS REQUIREMENT OF AVAILING ITS DIRECTORS SERVICES FOR EFFECTIVE MANAGEMENT OF ITS BUSINESS OPERATIONS IN NON-BANKIN G FINANCIAL ACTIVITIES. I THEREFORE HOLD THAT THE IMPUGNED DISALLOWANCE OF 5.50 LAC TO BE DELETED. ORDERED ACCORDINGLY. 4. THIS ASSESSEES APPEAL IS ALLOWED. ORDER PRONOUNCED IN OPEN COURT ON 25/01/2019 SD/- (S.S. GODARA) JUDICIAL MEMBE R KOLKATA, *DKP/SR.PS - 25/01/2019 ITA NO.778/KOL/2018 A.Y. 2 012-13 FREEWINGS POWER & INFR LTD. VS. DCIT, CIR-10(1), KOL. PAGE 6 / COPY OF ORDER FORWARDED TO:- 1. /APPELLANT-FREEWINGS POWER & INFRA LTD., GANGA BUSI NESS CENTRE, 4 DHAKINAPUR, SHOPPING COMPLEX-02, GARIHAT ROAD (S) KOLKATA-68 2. /RESPONDENT-DCIT,CIR-10(1), AAYAKARBHAWAN, P-7,CHOW RINGHEE SQ. KOL-69 3. ' % / CONCERNED CIT 4. % - / CIT (A) 5. & ))' , ' / DR, ITAT, KOLKATA 6. + / GUARD FILE. BY ORDER/ , /TRUE COPY/ / ',